Why Broadcom's Bullish Run Isn't Over Yet

Summary

The acquisition of Beceem Communications will supplement Broadcom's long-term growth.

Broadcom's decision to dump its baseband business will prove to be very beneficial for the company.

Increased focus on the infrastructure business will also benefit Broadcom.

Broadcom (NASDAQ:BRCM) shares have recovered remarkably in 2014 after a weak performance last year. The stock is up almost 30% since I last recommended it, and it looks like the good times are set to continue. The company's recent results were quite strong, indicating that the company is set for a strong performance in the future.

Robust performance

Broadcom, in the first quarter of 2014, reported revenue of $1.98 billion, down 3.9% sequentially and 1% year over year. Net income fell 14% to $165 million. The gross margin was down to 52%, a drop of 40 basis points. However, the EPS was $0.51 per share, $0.05 above the consensus estimates.

Revenue from the infrastructure and networking segment beat the estimates at $579 million, up by a percent sequentially. The broadband segment was also up 2%, while the mobile and wireless segment dropped 10% sequentially to $846 million. Looking ahead, the estimated revenue for the second quarter is around $2 billion, while the expected product gross margin will be up 75 to 175 basis points.

Growth opportunities ahead

Broadcom's acquisition of Beceem Communications has been a key driver in the 4G LTE business. BCM21892, the high-end modem, is yet to see volume production in 2014. The company currently faces some problems in the deliverance of this technology, and if it succeeds in delivering leadership app processors and modems to the handset market, then it could overcome the downfall in the mobile market.

Broadcom has announced the development of new chips that could double the speed of WiFi. Broadcom's 5G WiFi XStream chip platform gives the first ever six-stream 802.11ac multiple-input, multiple-output offering, which supports and enhances the current WiFi devices for high-definition streaming. The platform will hit production in the next quarter.

Broadcom leads the market with its connectivity chips that feature Wifi and Bluetooth. These are used in high-end smartphones. The company expects to see growth in this segment, backed by the LTE certification of its mobile solutions, continued strength in the data center, as well as rising 5G Wi-Fi and other multiple technology transitions.

Broadcom estimates that revenue for the infrastructure segment will continue to increase in the second quarter. The company also benefits from revenue via satellite and voice-over-IP components. It is also investing in the Internet of Things and wearable devices.

Broadcom, at around $38 per share, is a good option for investors with minimal downside risk. Also, if Broadcom's investment in LTE technologies goes well, then the share price is expected to go up.

Broadcom shares have jumped nearly 20% ever since the company announced that it will no longer pursue its cellular business. After years of failure, Broadcom finally decided to either sell off or close down its cellular business. The closing down of the baseband business, which makes chips used in connecting smart devices, is estimated to save the company roughly $700 million in yearly costs. The chipmaker plans to invest around $50 million in savings from the shut-down of its core broadband, infrastructure, and connectivity businesses.

Although it hasn't been long since Broadcom paid $164 million for buying Renesas Electronics' baseband business, I think doing away with the baseband business is a good move. The division was expected to generate about $200 million to $250 million in sales in the first six months of 2014, which isn't huge. To put it into perspective, market leader Qualcomm, generated $4.2 billion in the first quarter alone.

Investment bank Canaccord Genuity has praised Broadcom's decision to exit the baseband business. Canaccord said that this decision will "free up management attention and available cash to invest in more profitable areas." Analyst Matthew Ramsay said:

We believe management's recent decision to exit the cellular baseband business demonstrates an accurate assessment of the competitive dynamics and modest attainable profit pools in that market.

In addition, Broadcom is also looking to fortify its infrastructure division. Earlier this year, the company released the industry's first 10 Gbps millimeter wave SoC optimized for wireless backhaul and fronthaul applications. Richard Webb, Infonetics Research Directing Analyst of Microwave and Carrier Wi-Fi, said:

The growing demand of data services and connected devices are all driving mobile backhaul networks to new heights of capacity, resulting in the need for more cell site connections. The millimeter wave solution represents the next step in addressing these capacity needs and is proving to be a viable solution for backhaul in metro areas where range limitations aren't always problematic. Reaching 10 Gbps is a major milestone for the industry and raises the bar as an integrated SoC that will further drive the millimeter wave market.

Conclusion

Broadcom is making the right move to move out of the commoditized business for smartphone chips. Its focus on Big Data will lead to stronger growth and allow the company to deliver strong shareholder value going forward. So, there's a strong chance that Broadcom will be able to continue its strong run going forward, making it a solid pick.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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